Section 22 of the Canadian Trademarks Act – Depreciation of Goodwill, is fast becoming a popular mechanism for established brand owners in Canada seeking to protect their trademarks from dilution. In cases where claims of trademark infringement and passing off would be difficult or even impossible to make out, brand owners would be well advised to consider whether this section could come to their avail.

On June 11, 2020, the Federal Court handed down its ruling in the case of Toys “R” Us (Canada) Ltd. v Herbs “R” Us Wellness Society.

Toys “R” Us, a well-known retailer of toys, games and playthings brought an application before the Federal Court seeking an injunction and damages against Herbs “R” Us, a boutique cannabis dispensary in Vancouver.

Toys “R” Us is the owner of the following registered trademark in Canada:

Herbs R Us began to use the brand shown below in association with its cannabis dispensary.

Toys R Us claimed the following against Herbs R Us:

  1. Trademark infringement contrary to section 20 of the Trademarks Act;
  2. Passing off contrary to section 7 of the Trademarks Act; and
  3. Depreciation of goodwill contrary to section 22 of the Trademarks Act

The court held that Toys R Us did not establish trademark infringement or passing off in the claim. Although the trademarks were found to resemble each other to a significant degree, the court found confusion to be unlikely due to the marked and vast difference between the goods and services associated with each trademark and their respective channels of trade.

“…it strikes me as unlikely in the extreme that a Canadian consumer, even a casual one somewhat in a hurry with an imperfect recollection of the TOYS R US mark, would see the HERBS R US trademark and conclude that a well-known toy retailer had started branching out into storefront ‘dispensary’ services or cannabis sales…”

Toys “R” Us was however successful in its claim of depreciation of goodwill.

Section 22 of the Trademarks Act is prohibitive of use of a registered trademark in a manner that is likely to diminish the value of the goodwill attaching thereto.

Per Justice Binnie in Veuve Clicquot Ponsardin v. Boutiques Cliquot Ltée, depreciation of goodwill can come about through (1) disparagement (2) from reduction of distinctiveness resulting from a mark being bandied around by different users (3) through blurring of a brand image or (4) from a “whittling away” of the brand’s power to distinguish the owner’s products.

Importantly, the section 22 depreciation ground is not premised on a risk of likelihood of confusion. In other words, even in the absence confusing trademark use, there may be a likelihood of depreciation of goodwill.

In this case, Toys “R” Us was found to have made out the four elements required to substantiate the depreciation claim:

  1. Use of a registered trademark – for the purpose of section 22 use need not be of the registered trademark exactly as registered. Rather, it need only be “sufficiently similar” to the registered trademark to evoke in a relevant universe of consumers a mental association of the two marks. On this ground, the court found that the strong resemblance between the Herbs “R” Us trademark and Toys “R” Us trademark is sufficiently similar to evoke a mental association in the minds of consumers. Indeed, the Herbs “R” Us trademark was found to be so similar to the Toys “R” Us trademark that a “link, connection or mental association is all but inevitable and must be inferred to be intended.”
  2. Registered trademark is sufficiently well-known to have sufficient goodwill – In Veuve Clicquot, Justice Binnie listed a number of factors as relevant to the existence of goodwill including – fame, the degree of recognition of the mark, the volume of sales and depth of market penetration, extent and duration of advertising and publicity, geographic reach, degree of inherent or acquired distinctiveness, breadth of channels of trade and the extent to which the trademark is identified with a particular quality. The court found significant goodwill in the Toys “R” Us trademark. Affidavit evidence of significant sales volumes and extensive advertising and publicity effort were material.
  3. Linkage – The linkage required to meet the test is described as a “linkage, connection or mental association that is likely to have an effect on the goodwill in the registered trademark.” The dilution theory presumes some kind of mental association in the reasonable buyer’s mind. If a reasonable buyer is not likely to think of the senior user’s mark in his or her own mind, even subtly or subliminally, then there can be no dilution. The court found that a likelihood of linkage or mental association was established in this case. It was noted that while the question of linkage is one of evidence, there is no requirement for specific consumer evidence or survey evidence establishing the likelihood of linkage. In this case, a likelihood of linkage was inferred from the marked similarities between the trademarks combined with the evidence of extensive use, sales and advertising of the Toys “R” Us trademark. Additionally, the court, although noting that this was not the basis of its finding, referenced a newspaper article which drew an immediate connection between Herbs “R” Us and Toys “R” Us as evidence supporting its assessment that a likelihood of linkage or mental association existed.
  4. Damage – The court found that Herbs “R” Us’ use of its trademark would reduce the distinctiveness of the Toys “R” Us trademark by “whittling away” at the brand’s power to distinguish its products. Further, the court found Herbs “R” Us’ line of business i.e. cannabis to be “utterly inconsistent” with the reputation of Toys “R” Us, a more family friendly enterprise with the primary audience being children.

Finally, the court agreed with Toys “R” Us that there was no reason for Herbs “R” Us to adopt and use the Herbs “R” Us trademark other than to trade off the goodwill and reputation established by Toys “R” Us.

This decision is one for brand owners to know.

In the case of established brands, it serves as a powerful tool to prevent other businesses from depreciating or diluting the value and goodwill in their brands. This decision is especially useful in assisting established brand owners to defend their brand in cases where trademark infringement or passing off is difficult or impossible to make out.

In the case of smaller or start up brands, this decision serves as a cautionary tale. Brand owners who attempt to play on the goodwill and reputation of established brands are positioning themselves for costly litigation, rebranding and possibly failure.

Established brand owners would be well advised to police their brands in the marketplace and to protect them from depreciation or dilution. Start ups and smaller enterprises should make sure to commission due diligence searches before adopting brands and as best as possible … be original.